Shell to cut spending and sell assets after profit warning

Sarah Young

6 Min Read

A Shell logo is seen at a petrol station in London January 31, 2013. REUTERS/Luke MacGregor

LONDON (Reuters) - Anglo-Dutch oil company Royal Dutch Shell (RDSa.L) has suspended its controversial Arctic drilling program as part of a wider drive to cut spending and streamline operations following a major profit warning.

Just a month into the top job, Chief Executive Ben van Beurden set out plans to make the world’s No.3 investor-owned oil company leaner, with a new focus on growing cash.

The planned changes follow a profit warning for the quarter to the end of December that revealed across-the-board problems at Shell, which was also hit by industry-wide challenges of delivering attractive returns to shareholders in the face of flat oil prices and rising costs.

“Our overall strategy remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance,” van Beurden said.

Those improvements would be driven by cutting capital spending to $37 billion this year from $46 billion in 2013, while at the same time, increasing disposals, with a target to sell $15 billion worth of assets in 2014-15.

To keep investors happy, Shell said it would raise its first quarter dividend by 4 percent to $0.47 per share, in a move it touted as a sign of its ability to grow free cash flow.

Van Beurden, the company’s former head of refining who has been on the company’s board for just a year, said Shell would now abandon its previously set cash flow and spending targets.

“You can see how our returns are growing and then you can judge for yourself whether it’s a good story or not,” he said, appearing confident as he make his public debut as CEO at a media event in London.

Shares in Shell traded 1.3 percent higher at 2,154 pence at 1527, paring earlier gains of as much as 3.4 percent.

“This is a good start, they’re saying the right things, more loudly and more quantified than we had expected,” Royal Bank of Canada analyst Peter Hutton said, adding that the increase in the dividend was “confident” and ahead of his expectations.

Shell’s warning came two weeks after van Beurden replaced former boss Peter Voser, who had always insisted that an oil major needed to continue to invest throughout an economic cycle.

CHANGING TACK

The most high profile cancellation is this year’s planned controversial and costly hunt for oil in Alaska’s Arctic seas, reversing plans made as recently as December.

Divestments are also possible in U.S. shale interests, global oil products and onshore Nigeria, said van Beurden, as Shell looks to make “hard choices” across its portfolio in order to improve its capital efficiency.

Shell has over the last eight years spent around $5 billion searching for oil in Alaska’s Arctic seas, but the company said recent legal difficulties in addition to costs made the exercise “impossible to justify”.

The company was forced to cancel last year’s Arctic offshore drill after the grounding of a drillship in a storm in 2012 and against a backdrop of significant environmental opposition.

“Improving profitability in oil products and North America upstream will be a particular priority for us. We are restructuring both these two portfolios with asset sales and potentially further write-downs,” van Beurden said.

The $15 billion of disposals targeted for this year and next would be equivalent to around 6.5 percent of Shell’s current $228 billion market capitalization and compared to proceeds from divestments of $1.7 billion in 2013.

Amongst the assets Shell could put up for sale is its 23.1 percent stake in Woodside Petroleum (WPL.AX), which it owns from an abortive attempt to acquire the Australian oil and gas firm in 2001. Long viewed as non-core to Shell, the stake is worth about $6.5 billion.

Van Beurden declined to comment on specific sell-offs, promising more information at a strategy day on March 13.

Shell had already said last October that it would accelerate disposals, and the process started this month with $2.14 billion raised from selling stakes in projects in Australia and Brazil.

FOCUS ON RETURNS

Shell’s new focus on return on capital employed is such that it will be included in management remuneration package targets starting this year. “Our returns are at this point in time too low to be considered competitive,” he said.

RBC’s Hutton said that on a return on average capital employed basis, Shell was in line with peers at about 11 to 12 percent, but van Beurden said the company had slipped recently.

Shell had more opportunity than others to improve that metric, Hutton said, given that a high proportion of its capital was employed in projects yet to come onstream or in U.S. shale gas, where it is eyeing disposals.

Fourth-quarter earnings, excluding identified items and on a current cost of supply basis, came in at $2.9 billion, 48 percent lower than the same quarter last year but in line with a downgraded forecast Shell gave on January 17, making the quarter its least profitable for five years.

Chief financial officer Simon Henry flagged that like the fourth quarter, Shell’s first quarter production would be lower due to maintenance and the expiry of a license in Abu Dhabi, with Bernstein analysts calling the first quarter results outlook “weak”.